Cash basis for sole traders and landlords: when it doesn't suit you

By Matthew Hunt FMAAT, founder of Digivolve Accountants, Haywards Heath. Last reviewed 6 October 2026 for the 2026/27 tax year.

If you are a sole trader, a partner in a small partnership or a landlord, the way your profit is measured decides when you pay tax on it. Since April 2024 most self-employed people work out their profits on the cash basis by default, often without realising a choice has been made for them. For many that is simple and sensible. For some it moves income into the wrong year, blocks a deduction they expected, or causes problems later when they switch. This guide explains how it works and when it does not suit you.

The short version

Under the cash basis you count income when you receive it and expenses when you pay them, not when you invoice or are billed.
From the 2024/25 tax year the cash basis is the default for eligible sole traders and partnerships, and the old £150,000 turnover limit has gone.
You can still choose traditional (accruals) accounting by ticking the box on your Self Assessment return.
The old £500 cap on interest and the restrictions on using losses no longer apply to trades.
Landlords are under separate rules: the cash basis is the default only where property receipts are £150,000 or less.

What changed from April 2024

Before 6 April 2024 the cash basis was something you opted into. You could only join with turnover of £150,000 or less, and you had to leave once turnover went over £300,000. Interest deductions were capped at £500 a year and losses could only be carried forward against future profits of the same trade.

From the 2024/25 tax year that was reversed. The cash basis became the default method, the turnover thresholds were removed so eligible businesses of any size can use it, and:

Interest: you can deduct any amount of interest, as long as it is incurred wholly and exclusively for the trade.
Losses: cash basis losses now follow the same rules as traditional accounting, so they can be set sideways against your other income or carried back, not just carried forward.

Some businesses still cannot use it, including limited companies, limited liability partnerships, partnerships with a corporate partner, Lloyd’s underwriters, and farming or creative businesses with herd basis or profit averaging claims.

How income and expenses are treated

The principle is simple: only record income you actually receive, and do not count money you are owed. Expenses are deducted when paid. You can pick how you fix the date, for example the day money reaches your account, but you must use the same method each year.

Item	Cash basis	Traditional accounting
Sales	Taxed when the money arrives	Taxed when earned, usually when invoiced
Bills from suppliers	Deducted when paid	Deducted in the period they relate to
Stock for resale	Deducted when paid, no closing stock adjustment	Opening and closing stock adjustments needed
Equipment, vans, computers	Usually deducted as an expense when paid	Capital allowances
Cars	Capital allowances only	Capital allowances only
Customer who never pays	Never taxed, as it was never received	Taxed, then relieved as a bad debt

Stock is worth a closer look. Under the cash basis there is no stock count at the year end, so buying a large order just before 5 April gives you the deduction in that year even if none of it has sold. If you stop trading, the value of any stock left is brought in as income at that point.

Worked example: an invoice either side of 5 April

Emma is a self-employed graphic designer in England who makes up her accounts to 5 April. Near the end of the 2026/27 tax year:

She invoices a client £5,000 on 28 March 2027. The client pays on 12 April 2027.
She receives a £600 software bill dated 25 March 2027, which she pays on 10 April 2027.

Effect on 2026/27 profit	Cash basis	Traditional accounting
£5,000 invoice	£0 (taxed in 2027/28)	£5,000
£600 software bill	£0 (deducted in 2027/28)	minus £600
Net effect	£0	£4,400 more profit

On the cash basis £4,400 of profit moves into 2027/28. If Emma is a basic rate taxpayer that is £880 of income tax (20% of £4,400) paid a year later, before National Insurance. The tax is not saved, only deferred. But if her income is about to rise into the higher rate band, the same £4,400 could be taxed at 40% next year instead of 20% this year. Timing matters both ways.

The cash basis for landlords

Property businesses were not part of the 2024 changes and keep their own rules. The cash basis is the default for an individual landlord only where property receipts for the year are £150,000 or less. Above that, traditional accounting is compulsory. Companies, LLPs and trustees cannot use it.

Opting out: you tick the box on your return. The election must be made within one year of the filing date for that tax year.
Joint lets with a spouse or civil partner: if the income is treated as shared equally, you must both use the same basis.
Capital spending: there is no deduction for capital expenditure on assets used in an ordinary residential let (replacement of domestic items relief applies instead), on cars, or on the land and buildings themselves.
Mortgage interest: for residential property, relief on finance costs is restricted to the basic rate of income tax whichever basis you use.

When the cash basis does not suit you

Uneven timing. If large payments land just after 5 April, or customers pay deposits well before the work, your taxable profit can swing between years and push you into a higher band.
You need accounts a lender understands. Banks and mortgage lenders often prefer accounts showing what you are owed and what you owe.
You are planning to grow or incorporate. Moving off the cash basis later needs transitional adjustments so nothing is taxed twice or missed.
A landlord near £150,000. Crossing the limit forces a change of basis.

Common mistakes we see

Not knowing which basis the return uses. The default changed in 2024, and the box on the return is easy to miss.
Counting invoices instead of receipts. On the cash basis it is the date the money arrives that matters, especially around 5 April.
Claiming the cost of a car as an expense. Cars stay in capital allowances on the cash basis.
Landlords staying on the cash basis above £150,000 of property receipts.
Switching basis with no transitional adjustment, so income or costs are counted twice or not at all.

Questions and answers

Do I need to tell HMRC I am using the cash basis?

No. From 2024/25 it is the default for eligible sole traders and partnerships. You only need to act if you want traditional accounting, by ticking the box on your Self Assessment return.

Can a limited company use the cash basis?

No. Limited companies and limited liability partnerships cannot use the cash basis. It is only for unincorporated businesses.

Can I use the cash basis if my turnover is over £150,000?

For a trade, yes. The turnover limits were removed from 2024/25. For a property business, no. Landlords with receipts over £150,000 must use traditional accounting.

What happens if I move from the cash basis to traditional accounting?

You may need to make a transitional adjustment in the year you change, so that income and expenses are not counted twice or left out. It is worth getting the calculation checked.

Want us to check which basis suits your business?

If you are self-employed or a landlord and have never looked at which basis your returns use, a short review can stop tax landing in the wrong year. Book a free consultation, no obligation, and bring your last return: book a free consultation. Prefer to talk? Call or WhatsApp us on 01444 300981.

You can also see how we handle self-employed tax returns in Haywards Heath and landlord tax returns.

Sources

This guide is general information based on the rules for the 2026/27 tax year and is not personal advice. Your own position depends on your full circumstances.